Globalization of Fair Trade in the World Economy
Semester: 5th
Course: UnicertIVa
Supervisor: Dr. EdD Robert Evans
Submission date: 02.02.2015
Student: Kateryna Herman
Immatriculation number: 205149
Email: katia.german2010@yandex.ru
Table of Contents
Y
Abstract III
Introduction 1
Literature Review 3
The Fair Trade Movement 6
Supply chain of the Fair Trade products 8
Paying a Fair Price 10
Conclusion 12
References 14
Abstract
The main object of this paper it to provide clear information about functioning of the Fair Trade system in the global economy. Many of the consumers have a lack of information about what Fair Trade stands for, and that is why most of them are indifferent in their everyday choices, while making purchases. The market mechanism is a complicated system with its own rules and exceptions that makes much more difficult for producers especially small ones to exist. The main point of the Fair Trade is to support small householders in the developing countries and to sell their products on the world market by keeping the prices fair. Positive, negative sides of the Fair Trade will be considered in this paper.
Introduction
The world of trade is changing very fast and the number of countries being involved in it increasing every year. International trade happens for two reasons: first, countries trade because they are different from each other and can specialize on the production of such commodity, that they are relatively good at; second, countries trade in order to achieve economies of scale in production (Krugman, Obstfeld & Melitz, 2012, p.24). In the real world not each country gains from international trade. There are two the most famous types of countries: developing and developed. According to Nielsen, about 80-85 percent of the world's countries relating to developing and about 20-25 to developed (Nielsen, 2011, p.4). Consumers in the developed world are offered a wide range of products imported from distant lands, where source materials and labor are cheaper.
Fair Trade has appeared to improve the lives of producers in developing countries and it is the most important market-based mechanism (Nicholls & Opal, 2005, p.5). It is aimed to reduce the distance and create transparent trade relations, in most cases between disadvantaged farmers and consumers who are interested in purchasing commodities from those farmers (Jaffee, 2007, p.1). Biggest part of fair trade countries are located in Latin America and Caribbean, on the second place is Africa and Middle East and the remaining in Asia. In recent years Fair Trade sales are increased in Europe, North America and Japan (Nicholls et al., 2005, p.5). There are a wide range of products traded fairly, such as wine, tea, coffee, cotton, chocolate, food, flowers. Coffee sales is the second, after the petroleum, world traded good (Hilson, 2014, p.54). Fair trade helps producers who grew the coffee or picked the bananas, to get a larger share of the consumer's purchase price by cutting out many intermediaries. Exporters, importers, brokers usually reduce the farmers return by taking a percentage of the price for their services (Jaffee, 2007, p.2). Even if the consumer is willing to pay more, premium price, in order to help poor farmers, anyway just a few percent of the premium paid for coffee reaches the producer and the rest going to retailers (Sidwell, 2008, p.11).
Barriers such as tariff and subsidy reduction have influence on gains of developing countries as well. In theory, proposition of trade liberalization (the process of reducing barriers) is supposed to be welfare-enhancing as resources are transferred from protected sectors, in which a country does not have comparative advantage, to those sectors where it is more efficient and where it can export more successfully (Stiglitz, 2006, p.62).
Developing countries are keen on low tariffs on the goods that they export competitively. These are mainly labor-intensive goods, goods that are produced cheaply in countries with low wages and abundant unskilled labor. According to Krugman, high tariffs in the developed country will negatively influence the developing one. It will result in increase in prices that the consumers have to pay for imported goods, while reducing the price, by which producers in the developing have to sell it (Krugman, Obstfeld & Melitz, 2012, p.195). In the result producers are worse off from trade, but fair trade aims to help them by guaranteeing producers in poor countries receive a decent return - a fair and stable price or wage for their products. In case when world market price for a particular commodity falls below floor price, which covers the cost of production, fair trade importers guarantee to pay the floor price anyway (Nicholls & Opal, 2005, p.6). Also small farmers can receive a premium, that allows to plan ahead or invest, for example to buy more land, making production wider, or satisfy social needs. It helps to rise the quality of their goods, make land more productive, support health services and women's rights (Nicholls et al., 2005, p.7).
Fair trade premium allows to build schools, buy chairs and tables, to make real floors and windows to keep the wind. So that more children can get an education, that leads to reduction of the use of child labor (Litvinoff et al., 2006, p.3). Also fair trade makes producers move out from poverty by trade rather than aid.
It became easier to recognize fair trade product on the market, because almost twenty years ago fair trade system used a label to certify fairness. To get the certification and carry the label, products have to meet a series of criteria such as: guaranteed floor price to producers; advance payment to producers; long-term contracts and trading relationships; financial transparency; financial and technical help to producers; safe working conditions (Jaffee, 2007, p.2). Fair trade represents a new partnership approach between buyer and supplier. There is more attention that goes to the producer rather than the consumer.
The main purpose of this academic paper is to provide information that can help to understand what is Fair Trade about, what makes it special and different from the other trade systems, and why it has the right to exist today.
The structure of this paper is as follows: in the first section, an overview of recent academic publications is provided, following by theoretical background of the Fair Trade movement. In the second section, supply chain of Fair Trade products, price creation and customers attitude. Finally, a conclusion is made.